Insurance principle, development and growth in India

SEMINAR PAPER
ON
Insurance Principles, Growth and development in India

BY : GEMECHU FEYISSA GUDU

Submitted To:
JASMINDEEP KAUR (Prof)
PATIALA
INDIA

Nov 8, 2016

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2016

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Insurance principle, development and growth in India

Contents
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DEFINITION OF INSURANCE
The term insurance has been defined by different experts based on the
following three categories .
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1) General Definitions
2) Functional Definitions
3) Contractual Definitions
1. GENERAL DEFINITION
The general definition are given by the social scientists and they consider
insurance as a device to protection against risks, or a provision against inevitable
contingencies or a co-operative device of spreading risks.
Some of such definitions are given below
In the words of John Magee, Insurance is a plan by which large number of
people associate themselves and transfer to the shoulders, of all risks that
attach to individuals.
In words of Sir William Bevridges, The collective bearing of risk is
insurance.
2.

FUNCTIONAL DEFINITION

This definitions is based on economic or business oriented, since it is a

device providing financial compensation against risk or misfortune.
In the words of D. S. Hansell Insurance may be defined as a social device
providing financial compensation for the effects of misfortune, the
payment being made from the accumulated contributions of all parties
participating in the scheme.
In the words of Robert I. Mehr and Emerson Commack Insurance is
purchased to off-set the risk resulting from Hazards which exposes a
person to loss.
In the words of Riegel and Miller, Insurance is a social device where by
the uncertain risks of individuals may be combined in a group and thus
made more certain, small periodic contributions by the individuals
providing a fund, out of which, those who suffer losses may be
reimbursed.
3. CONTRACTUAL DEFINITION
These Definitions consider as a contract to indemnity the losses on happening
of certain contingency in future. It is a contractual relationship to secure against risks.
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Some of such definitions are
the words of Justice Tindall, Insurance is a contract in which a sum of
money is paid to the assured as consideration of insurers incurring the risk
of paying a large sum upon a given contingency.
In the words of E. W. Patterson, Insurance is a contract by which one
party, for a compensation called the premium, assumes particularly risks of
the other party and promises to pay him or his nominee a certain or
ascertainable sum of money on a specified contingency.
In the words of Justice Channel, Insurance is a contract where by one
person, called the insurer, undertakes in return for the agreed insurer,
undertakes in return for the agreed consideration called premium, to pay to
another person called insured, a sum of money or its equivalent on
specified event.
BASIC PRINCIPLES OF INSURANCE
The following are basic principle of insurance
1)
2)
3)
4)
5)
6)

Insurable Interest
The principle of indemnity
The principle of contribution
The principle of subrogation
The Principle of Utmost Good Faith
The Principle of Proximate Cause

.
1.

THE PRINCIPLE OF INSURABLE INTEREST

The existence of insurable interest is an essential ingredient of any insurance

contract. Insurable interest is the pre-requisite for insurance.
A common definition used for insurable interest is The legal right to insure
arising out of financial relationship, recognized under law, between the insured and
the subject matter of insurance. therefore, just as the owner of a house or a factory
has an insurable interest in the house or factory, the bank that has lent money for the
construction of the house or the factory too has an insurable interest in these to the
extent of the outstanding loan amount since in the event of the damage or destruction
of the property, the bank stands to lose a part or the whole of the money lent.
A person who wants to insure must have insurable interest in the property to
be insured.
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The essentials of insurable interest are There must be a property capable being insured.
Such a property must be subject matter of interest.
The insured should have a legal relation to the subject matter insurable interest
could arise in a number of ways such as
Ownerships,Mortgagee,Trustee, Bailee,Lessee
In fire insurance, the insurable interest must exist throughout the contract.
It must exist At the inception i.e. while placing the proper for insurance.
During the currency of the policy, i.e. the interest should not cease during the
period of insurance.At the time of loss i.e. in the event of fire accident the insured should co
ntinue to have the interest in the property to claim insurance money.
It can be seen that insurable interest has three essential elements;
1)

There must be property, right, interest, life for potential liability capable of

being insured.
2)

Such property, right interest, life or potential liability must be the subject

matter of insurance.
3)

The insured must bear a legal relationship to the subject matter such that he

stands to benefit by the safety of the property, right interest, life of freedom of
liability. By the same token, he must stand to lose by any loss, damage, injury
or creation of liability.
An insurance contract essentially promises by operation of an insured peril. It
could, therefore be said that, in the strictest sense, fire insurance policy covers not the
property perse, compensation to cover the damage or loss. The banker who has lent
money would be eligible to recover his outstanding loan amount from the claim
amount. The above points would be clear when one makes a distinction between the
subject matter of insurance and the subject matter of an insurance contract. The
former (subject matter of insurance) relates to property being insured against, which
has an intrinsic value of its own. The subject matter of an insurance contract on the
other hand is the insureds pecuniary interest in that property. It is only when the
insured has such an interest in the property that he has the legal right to insure an
example of this, a stated earlier, is the interest of the bank such interest is required to
make the insurance contract enforceable by law. Lack of it would render the contract
void. It is worth mentioning that it is the principle of insurable interest that
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distinguishes insurance from gambling or wager agreements. In the latter insurance,
for example one could insure somebody elses property and then be tempted to
deliberately bring about the loss to collect the claim under the policy.
Referring to life insurance, a person is deemed to have insurable interest on his
own life to an unlimited extent, as in the event of his pre-mature death, there will be
loss of his future earnings of individual. However by application of the human life
value of concept, reasonable estimate can be made. Insurance companies, therefore,
limit the amount of insurance, taking into account the proposers present income and
age.The limiting factor in life insurance is the proposers capacity to pay premium
for insurance on own life.
Spouses are presumed to have insurable interest in each others life. However
in case of other members of the family, insurable interest is not presumed to exist. A
person cannot, therefore, insure, say his brother or sister though they may dependent
on him.
THE PRINCIPLE OF UTMOST GOOD FAITH
The principle of utmost good faith is mostly discussed in the context of the
duty of the insured towards the insurer, though it is equally applicable to the insurers
duty towards the insured.In insurance contract, the prosper is the only person who is dee
med to have
all the facts of the subject matter of insurance and the insurer is to completely
rely on what the proposer has disclosed. The proposer, should therefore, furnish all
material facts concerning the property proposed insurance which would enable the
insurance company to decide the appropriate rates and the terms and condition.
The duty of disclosure of material facts continues throughout the contract and
the insured should advice the insurance company wherever change occurs in the
property insured.
The insured need not disclose the facts of the following nature
Facts which would diminish the risk of insured peril, e.g. Appointing a night watchman.
Which are presumed to have been known to the insurer, e.g. large scale rioting in the area.
Facts which could be understood from the information already furnished e.g.
Customary process in an industry.
Which ought to have been enquired but omitted by the insurer. This will beconstrued as
warranty by the insurer.
For example, information about ones property or person including one
health, habits, personal history, family history, etc., are known only to the person
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taking insurance and rarely are public knowledge. Yet these issues are important for
assessing the risk and deciding the rate of premium to be charged. The insurance
company can know most of these facts only if the prospect comes forward to disclose
them truthfully.
It may be argued that insurers could take steps to ascertain the facts. For
example in property insurance, the insurer could survey the property while in long
term insurance one can insist on medical reports and special reports from a panel of
doctors/specialists appointed by them. The risk can be assessed accordingly.
However, the important point to not is that there may be certain aspects of
health that may not be easily detected in a routine medical examination. To illustrate a
person suffering from hypertension or diabetes can manage to hide these facts if he
were to appear for medical examination after taking the appropriate medicines
similarly it may not be easy to detect past history of health and family history in a
routine medical examination. In property insurance it may not be feasible to examine
each and every property being proposed for insurance, and the hazards to which it is
being exposed in minute detail.
It is for the above reasons that law subjects insurance contracts to a higher
obligation Good Faith Contracts become utmost Good Faith Contracts when it
comes to insurance. The proposer has to disclose everything that is relevant to the
subject matter of insurance, as the ensurer knows nothing about them.
3.

THE PRINCIPLE OF INDEMNITY

The object of insurance is to place insured in the same financial position as

was just before the loss. This principle prevents the insured from making a profit out
of loss and ensures public interest at large.
For example, if a sofa-set insured and is destroyed by fire, the insurance
company will make good to loss by taking into consideration the depreciation and
wear the tear of the sofa-set having been in use by the insured for some time. It will
not be true indemnity to pay the price of a new sofa-set as the insured has enjoyed the
use of the sofa-set for some years. If the insurance company pays him the money to
get a new sofa-set, it may tempt him to set fire to the sofa so that he could get a new
sofa-set for old at insurance cost.
For a building damaged by fire measure of indemnity is the cost of repairing
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the building to its pre-fire condition. For machinery the measure of indemnity is the
cost of repair, if the machinery is destroyed by fire the market value of such a
machine after taking in to consideration wear and tear and depreciation. For stock in a
retail shop the measure is the cost of replacement at wholesale rate. For manufacturer
it is the cost of labour, fuel, and overheads. The indemnity is for the net loss suffered
by the insured and therefore, if there by any salvage of the damaged property, the
value of the salvage is deducted from the amount of loss.
In marine insurance, the indemnity is in the manner and the insured. It is so
provided in the marine insurance act 1963.
In the case of personal accident policies it is not possible to place a value on
life as such. Hence personal accident policies are called benefit policies.
There are four methods of indemnification and they are.

Cass payment
Repair
Replacement
reinstatement

In case of life insurance, however, the economic value of a human life cannot be
measured precisely before death. It could in fact be unlimited. Hence, life insurance
cannot strictly be a contract of indemnity. This does not however, mean a person can
be granted life insurance for an unlimited amount.
4.

THE PRINCIPLE OF SUBROGATION

Subrogation is principle, which applied to all contracts of indemnity. It means

that after payment of the loss the insurer gets the right of taking all steps to recover
any money in compensation from a third party. Technically speaking Subrogation is
the right, which an insurer gets, after he has indemnified the loss, to step into the
shoes of the insured and avail himself of all the rights against their party in respect of
loss indemnified.
The subrogation principle prevents the insured of collecting the twice of the
same loss at first instance, and wrong doer would escape liability at second. It
strengthens the ares of insurer in cases of possibility of one recovery of mis doings,
stealing or damaging made by third party and recovering the goods indemnified.
5.

CONTRIBUTION

The contribution is the right of an insurer who has paid a loss under a policy to
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recover a proportionate amount from other insurer who is liable for the loss. Such
situations only arise

When different insurer has agreed to contribute the loss by way of collecting
proportionate premium.
The policies are in existence at the time of loss.
The policies are legally enforceable at law.
The interest covered under all the policies are same, and effected in favour of

a common insured.
Indemnity is also governed by the principle of contribution. The insurer is liciple of to
contribute proportionately loss to the extent of its interest. If a property has been
insured with more than one insurer, in the event of a loss the insured will get a
proportionate part of the loss from each insurer, so that the insured does not make a
profit out of the settled claim.
NATURE OF INSURANCE CONTRACT
Insurance contracts like other contracts are governed by the general principles
of the law of contract as codified in the Indian contract act 1872, which prescribed the
following essential elements in order for contract to be legally valid
(i)

Offer and acceptance

(ii)

Consideration

(iii)

Agreement between parties

(iv)

Capacity of the parties

(v)

Legality of the contract

HISTORY OF INDIAN NSURANCE SECTORE

Regrettably, the Indian insurance industry has lagged behind even amongst the
developing countries of the world. Although general insurance services started in
India about 150 years ago, their growth has been dilatory, as reflected by low
insurance penetration and density. Several factors are responsible for this state of
affairs, the chief being the monopoly status of the industry till recently. The life
insurance business was nationalized in 1956 and the general insurance industry in
1973. The lack of competition has impeded the development of insurance industry in
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India, resulting in low productivity and poor quality of customer services.
The process of liberalization and globalization of the Indian economy started in right
earnest in mid-1980s. The market mechanism was the motivating factor underlying
the new economic policy. In consonance with the new economic policy, insurance
sector was opened up for the private sector in 1999. The new competitive
environment is expected to benefit the consumers, industry and the economy at large.
The consumer will have a greater choice in terms of number and quality of products,
low premium rates, efficient after sales services while the economy will benefit in
terms of larger flow of savings, increased availability of investible funds for longterm projects, enhanced productivity and growth of multiple debt instruments.
LIC
Life Insurance had its beginning in ancient Rome, where citizens formed
burial clubs that would meet the funeral expenses of its members as well as help
survivals by making its payments.
The first stock company to get into the business of insurance was chartered in
England in 1720. In the year 1735 saw the birth of the first insurance company in
American Colonies in Charleston. In 1759, the Presbyterian Synod of Philadelphia
sponsored the first Life Insurance Corporation in America. However, it was after 1840
that Life Insurance really took off in a big way.The 19th century saw huge developments
in the field of insurance with the newer products being devised to meet growing needs.
The history of insurance in this country is somewhat darken. The earliest
reference of life insurance was available in the days of East India Company, when the
policies were taken only by the British officers. The policy was issued by British
officers in sterling currency. Oriental was the first foreign insurance company
established in India in 1818. Foreigners, orphans and widows were become subject
matter for the oriental company. The company started accepting the Indians in 1934
due to the efforts of Babu Muttylai seal. Bombay Life, a company had issued short
term policies for 2-3 years in 1823. Raja Ram Mohan Roy, the man who pleaded for
protecting widows through government insurance 'Bombay Mutual Life Assurance
Society was established by some prominent citizens of Bombay in 1871. European
merchant also started 'Bombay Insurance Society' in 1893 by voluntary efforts. Mr.
Curstjee Furdoonju was the first insured person of India. This policy was insured in
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1848 by royal Insurance which started in 1845. It was the beginning of the Indian
insurance venture.
BACKGROUND
Prior to Nationalization, 107 companies including branches of some foreign
insurance companies, operated in the country Under the General Insurance Business
Nationalisation Act 1972, these were amalgamated and grouped in to 4 operating
companies viz.

National Insurance Company Ltd Head Office Kolkota

The New India Insurance Company Ltd Head Office Mumbai.
The Oriental Insurance Company Ltd Head Office New Delhi.
The United India Insurance Company Ltd Head Office Chennai.

They became subsidiaries of a holding company namely Genera Insurance,Corporation

of India which came into being on January 1, 1973.
The paid-up capital of GIC is fully subscribed by the government of India, and
that of the 4 companies, fully by GIC. All the five entities are thus government
companies registered under the companies Act. Although established under act of
Parliament. All the five companies have Boards of Directors. The GIC Board has a
fulltime Chairman assisted by 2 Managing Directors. The Chairman and Managing
Directors are member of the board. The Additional Secretary (Insurance Division) is
ex. officio nominee member on the Board. There are part time members on the Board
nominated by Government from among Chief Executives of Financial Institutions
(LIC, State Bank, Exim Bank, IDBI) and prominent representatives of special
interests, social and economic groups. The Chairman-cum-Managing Directors of the
four companies are permanent invites on the Board.
The GIC as a holding company is responsible for superintending, controlling
and carrying on the business carry or direct business operations on all Indian basis.
The GIC does not carry on direct insurance operations expecting, Aviation Insurance
of the National Carriers. It has reinsurance arrangements with the 4 companies where
under 20% of their business is ceded by the companies to GIC. It also administers the
corp. Insurance scheme on behalf of Government.

Insurance sector growth and development in India (current scenario

October 2016)
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Introduction
The insurance industry of India consists of 53 insurance companies of which 24 are in life
insurance business and 29 are non-life insurers. Among the life insurers, Life Insurance
Corporation (LIC) is the sole public sector company. Apart from that, among the non-life
insurers there are six public sector insurers. In addition to these, there is sole national reinsurer, namely, General Insurance Corporation of India (GIC Re). Other stakeholders in
Indian Insurance market include agents (individual and corporate), brokers, surveyors and
third party administrators servicing health insurance claims.
Out of 29 non-life insurance companies, five private sector insurers are registered to
underwrite policies exclusively in health, personal accident and travel insurance segments.
They are
1.
2.
3.
4.
5.

Star Health and Allied Insurance Company Ltd,

Apollo Munich Health Insurance Company Ltd,
Max Bupa Health Insurance Company Ltd,
Relig are Health Insurance Company Ltd and
Cigna TTK Health Insurance Company Ltd.

There are two more specialised insurers belonging to public sector, namely, Export Credit
Guarantee Corporation of India for Credit Insurance and Agriculture Insurance Company
Ltd for crop insurance.

Market Size
During April 2015 to March 2016 period, the life insurance industry recorded a new premium
income of Rs 1.38 trillion (US$ 20.54 billion), indicating a growth rate of 22.5 per cent. The
general insurance industry recorded a 12 per cent growth in Gross Direct Premium
underwritten in April 2016 at Rs 105.25 billion (US$ 1.55 billion).
Indias life insurance sector is the biggest in the world with about 360 million policies which
are expected to increase at a Compound Annual Growth Rate (CAGR) of 12-15 per cent over
the next five years. The insurance industry plans to hike penetration levels to five per cent by
2020.

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The countrys insurance market is expected to quadruple in size over the next 10 years from
its current size of US$ 60 billion. During this period, the life insurance market is slated to
cross US$ 160 billion.
The general insurance business in India is currently at Rs 78,000 crore (US$ 11.44 billion)
premium per annum industry and is growing at a healthy rate of 17 per cent.
The Indian insurance market is a huge business opportunity waiting to be harnessed. India
currently accounts for less than 1.5 per cent of the worlds total insurance premiums and
about 2 per cent of the worlds life insurance premiums despite being the second most
populous nation. The country is the fifteenth largest insurance market in the world in terms of
premium volume, and has the potential to grow exponentially in the coming years.
Investments
The following are some of the major investments and developments in the Indian insurance
sector.
Max Life Insurance Co Ltd and HDFC Life Insurance Co Ltd have signed a merger
agreement, which is expected to create India's largest private sector life insurance
company once the transaction is completed.
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Lloyds, a UK-based reinsurer, plans to make its entry in Indian markets by early
2017, after receiving the approval from Insurance Regulatory and Development
Authority (IRDA) to operate in India through its market model wherein a set of
members collectively come together to underwrite and provide reinsurance.
The Insurance Regulatory and Development Authority of India (IRDAI) plans to issue
redesigned initial public offering (IPO) guidelines for insurance companies in India,
which are to looking to divest equity through the IPO route.
Aviva Plc, the UK-based Insurance company, has acquired an additional 23 per cent
stake in Aviva Life Insurance Company India from the joint venture (JV) partner
Dabur Invest Corporation for Rs 940 crore (US$ 141.3 million), thereby increasing
their stake to 49 per cent in the company.
The Insurance sector in India is expected to attract over Rs 12,000 crore (US$ 1.76
billion) in 2016# as many foreign companies are expected to raise their stake in
private sector insurance joint ventures.
QuEST Global, a pure-play engineering and Research and Development (R&D)
services provider, has raised investment of around Rs 2,396 crore (US$ 351.54
million) from leading global investors Bain Capital, GIC and Advent International for
a minority stake in the company.
Insurance firm AIA Group Ltd has decided to increase its stake in Tata AIA Life
Insurance Co Ltd, a joint venture owned by Tata Sons Ltd and AIA Group from 26 per
cent to 49 per cent.
Canada-based Sun Life Financial Inc plans to increase its stake from 26 per cent to 49
per cent in Birla Sun Life Insurance Co Ltd, a joint venture with Aditya Birla Nuvo
Ltd, through buying of shares worth Rs 1,664 crore (US$ 244.14 million).
Nippon Life Insurance, Japans second largest life insurance company, has signed
definitive agreements to invest Rs 2,265 crore (US$ 332.32 million) in order to
increase its stake in Reliance Life Insurance from 26 per cent to 49 per cent.
Bennett Coleman and Co. Ltd (BCCL), the media conglomerate with multiple
publications in several languages across India, is set to buy Religare Enterprises Ltds
entire 44 per cent stake in life insurance joint venture Aegon Religare Life Insurance
Co. Ltd. The foreign partner Aegon is set to increase its stake in the joint venture from
26 per cent to 49 per cent, following governments reform measure allowing the
increase in stake holding by foreign companies in the insurance sector.
GIC Re and 11 other non-life insurers have jointly formed the India Nuclear Insurance
Pool with a capacity of Rs 1,500 crore (US$ 220.08 million) and will provide the risk
transfer mechanism to the operators and suppliers under the CLND Act.
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State Bank of India has announced that BNP Paribas Cardif is keen to increase its
stake in SBI Life Insurance from 26 per cent to 36 per cent. Once the foreign joint
venture partner increases its stake to 36 per cent, SBIs stake in SBI Life will get
diluted to 64 per cent.
Government Initiatives
The Government of India has taken a number of initiatives to boost the insurance industry.
Some of them are as follows:
The Union Budget of 2016-17 has made the following provisions for the Insurance Sector:
Foreign investment will be allowed through automatic route for up to 49 per cent subject to
the guidelines on Indian management and control, to be verified by the regulators.
Service tax on single premium annuity policies has been reduced from 3.5 per cent to 1.4 per
cent of the premium paid in certain cases.

Government insurance companies to be listed on the exchanges

Service tax on service of life insurance business provided by way of annuity under the
National Pension System regulated by Pension Fund Regulatory and Development Authority
(PFRDA) being exempted, with effect from April 01, 2016.
The Insurance Regulatory and Development Authority (IRDA) of India has formed two
committees to explore and suggest ways to promote e-commerce in the sector in order to
increase insurance penetration and bring financial inclusion.
IRDA has formulated a draft regulation, IRDAI (Obligations of Insures to Rural and Social
Sectors) Regulations, 2015, in pursuance of the amendments brought about under section 32
B of the Insurance Laws (Amendment) Act, 2015. These regulations impose obligations on
insurers towards providing insurance cover to the rural and economically weaker sections of
the population.

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The Government of India has launched two insurance schemes as announced in Union
Budget 2015-16. The first is Pradhan Mantri Suraksha Bima Yojana (PMSBY), which is a
Personal Accident Insurance Scheme. The second is Pradhan Mantri Jeevan Jyoti Bima
Yojana (PMJJBY), which is the governments Life Insurance Scheme. Both the schemes offer
basic insurance at minimal rates and can be easily availed of through various government
agencies and private sector outlets.
The Uttar Pradesh government has launched a first of its kind banking and insurance services
helpline for farmers where individuals can lodge their complaints on a toll free number.
The select committee of the Rajya Sabha gave its approval to increase stake of foreign
investors to 49 per cent equity investment in insurance companies.
Government of India has launched an insurance pool to the tune of Rs 1,500 crore (US$
220.08 million) which is mandatory under the Civil Liability for Nuclear Damage Act
(CLND) in a bid to offset financial burden of foreign nuclear suppliers.
Foreign Investment Promotion Board (FIPB) has cleared 15 Foreign Direct Investment (FDI)
proposals including large investments in the insurance sector by Nippon Life Insurance, AIA
International, Sun Life and Aviva Life leading to a cumulative investment of Rs 7,262 crore
(US$ 1.09 billion). The Insurance Regulatory and Development Authority of India (IRDAI)
has given initial approval to open branches in India to Switzerland-based Swiss Re, Frenchbased Scor SE, and two Germany-based reinsurers namely, Hannover Re and Munich Re.
Shares in non-life insurance market

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Motor insurance accounted for 39.41 per cent of the gross direct premiums earned
in FY16* (up from 41 per cent in FY06), at US$ 1.01 billion till September 2015
At US$ 0.71 billion (till September 2015), the health segment seized 27.75 per cent
share in gross direct premiums
Private players contribute around 50.2 per cent in the total revenue generated in non
life insurance sector while public companies contributes around 49.8 per cent share
by September 2015

Summery

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The general definition are given by the social scientists and they consider
insurance as a device to protection against risks, or a provision against inevitab

lecontingencies or a co-operative device of spreading risks.

The following are basic principle of insurance
Insurable Interest,
The principle of indemnity,
The principle of contribution
The principle of subrogation,
The Principle of Utmost Good Faith etc
During April 2015 to March 2016 period, the life insurance industry recorded a new
premium income of Rs 1.38 trillion (US$ 20.54 billion), indicating a growth rate of
22.5 per cent. The general insurance industry recorded a 12 per cent growth in Gross
Direct Premium underwritten in April 2016 at Rs 105.25 billion (US$ 1.55 billion).
Indias life insurance sector is the biggest in the world with about 360 million policies
which are expected to increase at a Compound Annual Growth Rate (CAGR) of 12-15
per cent over the next five years. The insurance industry plans to hike penetration
levels to five per cent by 2020.

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